Headlines such as “Spain becomes cannabis hub as criminals fill tourism void” (The Guardian 9 October 2020) serve to remind us of the endemic demand for marijuana, the resultant profits to be made and enforcement agencies’ inability to control Europe’s illegal trade run by drug mafias. By contrast, Canada, on 17 October 2018 and following the example of Uruguay, elected to legalise adult personal possession, sharing and cultivation of recreational cannabis.

As foreseen by many investors, the Canadian cannabis industry has thrived in the last two years, with various market forecasts indicating that it could be worth between C$4.9bn and C$8.7bn (approx. £2.8 to £5bn) annually from 2021, with some predicting the market size will be worth C$97.35bn (approx. £56bn) by 2026. In the US there is said to have been a meteoric rise in Cannabis SPAC (Special Purpose Acquisition Companies) IPO’s providing private marijuana and hemp companies an unprecedented opportunity to raise money and go public (e.g. in 2019 $2.6 billion; $700 million in the first half of 2020).

Where does this leave a UK investor, anxious to reap such rewards by cannabis investment in a former crown colony?

To recap

At the time of the Canadian legislation, we wrote about the problems for UK investors (individuals and corporates) potentially falling foul of the Proceeds of Crime Act 2002 (POCA) by committing money laundering offences if they invested in the Canadian cannabis industry. Cannabis is a Class B drug and cultivation, possession or supply is illegal here in the UK (there are a few exceptions in respect of medicinal cannabis which we deal with below). Under POCA, ‘criminal property’ is given a wide definition as property which represents a person’s benefit from any conduct which would amount to a criminal offence in the UK if it were to occur here. As such, under the strict letter of the law, proceeds made legitimately in the cannabis industry in Canada (or elsewhere) will be ‘criminal property’ in the UK. The possessor of such property would commit a money-laundering offence in the UK, making them potentially liable for prosecution and confiscation of that property. The exceptions introduced under the Serious Organised Crime and Police Act 2005 (SOCPA) – colloquially known as the ‘Spanish Bullfighter Exception’ – do not assist UK investors here, as all offences related to cannabis are punishable by a term of imprisonment greater than 12 months.

As we wrote, the only way to avoid committing a money laundering offence would be to seek a Defence Against Money Laundering (DAML) from the NCA which involves seeking their consent before dealing with criminal property; in which case no offence is committed under POCA.

Developments in the UK in the last two years

So what developments have there been since?

(1)November 2018 – partial legalisation of medicinal cannabis

In November 2018 the supply of cannabis-based products for certain medical conditions was made lawful in the UK. Nevertheless, it is tightly regulated and a licence is required. This may assist an investor who invests in a Canadian cannabis company which produces medicinal cannabis only on the same basis as those licenced in the UK. However, this is untested and in reality it is doubtful that such a company would exist in Canada (see below FCA guidance for listing of cannabis related businesses).

Moreover, there is currently no government policy pertaining to the conditions that these products can be prescribed for. For example, the laws governing CBD products are somewhat vague creating a large amount of confusion over the allowable THC limits in hemp-derived CBD products. Some of these regulations are EU driven and it remains uncertain what will happen as the UK exits the European Union.

(2)December 2018 – Lloyds of London circular re the insurance industry

The following month, Lloyds of London published a circular that suggested adopting a purposive interpretation of POCA, providing that insurance in respect of Canadian cannabis risks would not meet the dual criminality test. This was on the basis that POCA was not designed to preclude “wholly lawful conduct such as the provision of insurance of business activity carefully legalised in another country”. Again this interpretation is untested (and some commentators question its accuracy) so cannot be relied on by an investor.

(3)June 2019 – the Law Commission calls for guidance in relation to transactions involving the legal cannabis industry

This featured in the Law Commission’s report on the suspicious activity report (SAR) regime because of the huge increase in DAML applications in respect of the legal cannabis industry (as referred to above).

UK Finance, a trade association for the UK banking and financial services sector, was consulted by the Law Commission on the SAR regime and its applicability to cannabis investors. It is quoted as saying that "common sense would suggest that reports about dealings with the proceeds of such lawful businesses would be of no actionable or intelligence value to law enforcement, but the legal position is less clear".

No such guidance has been provided and as such DAMLs have to be made for each and every transaction. Commentators have opined that they expect a further increase in the number of SARs being filed about lawful cannabis production overseas.

(4)September 2020 – FCA guidance for listing of cannabis related businesses

On 18 September 2020, the Financial Conduct Authority (FCA) published a statement regarding listing of cannabis-related businesses due to the dearth of guidance in any form. Whilst an FCA guidance consultation is pending and will follow in due course, the FCA’s view is that “there remains a risk that the proceeds from overseas medicinal cannabis business may constitute ‘criminal property’ for the purpose of POCA. This includes where the company possesses a licence issued by an overseas medicines or pharmaceuticals licensing authority.” The FCA is clear that “proceeds from recreational cannabis companies, even when they are located in those jurisdictions that have legalised it, are the proceeds of crime under POCA.

Regarding recreational cannabis companies, the FCA had made plain that the securities of those companies, even those in jurisdictions where it is entirely legal, will not be admitted to the Official List. UK-based medical cannabis companies can be admitted to the Main Market as long as they have the appropriate UK Home Office licences in place. Overseas-licenced medical cannabis companies will be assessed on a case-by-case basis. In order to be admitted to the Main Market, the FCA must be satisfied that POCA does not apply and the usual criteria for listing are met.

The FCA guidance provides clarity for foreign cannabis companies dealing exclusively in medicinal cannabis (despite the significant due diligence required by the FCA to prove that the company does not contravene POCA) and for companies that are fully licenced for all their activities in the UK. Hence for those who invest in such companies admitted to the Main Market; POCA poses no threat to the investor. However, it is restricted to these cases.

So what does the future hold for cannabis UK investors?

It follows from the above that since October 2018 very little progress has been made towards changing the legal position for UK investors. Conversely, there is little appetite by the UK enforcement agencies to prosecute these offences; not one prosecution has yet been brought. On one view this might be encouraging for the UK investor. Equally, it means that there has been no test case to provide any guidance. So, until there is such guidance or a change in the law, the only comfort for an investor is to seek a DAML.

Meanwhile, a report in December 2019 from Prohibition Partners forecasts the UK legal cannabis market to reach £2.31bn by 2024. The cannabis investment sector that is gaining traction in Europe is also turning its attention towards the UK market, the report notes. Numerous consultancies, market research and cannabis-focused finance groups have opened up in London – the city also playing host to the annual Cannabis Europa Conference. It adds that “Major cannabis companies are also having success in the UK. GW Pharmaceuticals, the largest exporter of legal medical cannabis in the world, is headquartered in England, and operates numerous sites across the south of the country. Joining them are numerous foreign cannabis industry giants… which have recently put down roots in the UK through the establishment of subsidiaries in order to secure competitive footholds in a UK market that is primed for expansion”.

In addition, there have been many calls for reform. In April 2019, Arfon Jones, Police and Crime Commissioner for North Wales, has called for the British Government to regulate cannabis to help prevent the rise in criminal gangs. In July 2019, a cross-party group of MPs went on a fact-finding trip to Canada to learn about the country’s approach to cannabis. They predicted that recreational cannabis will be fully legalised in the UK in five to ten years. A poll taken in December 2019 revealed that 53% of UK adults would support legalisation in some form. However, there is no indication that this will happen any time soon or indeed if at all.

A version of this blog was published by Law360 on 26 October 2020.